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EU report calls for rethink on postal market abuse investigations

Tuesday, January 22nd, 2013

New research from the European Commission suggests that national regulators around Europe need to rethink how they investigate dominant postal market players for abusive pricing.

The EUR 300,000 study commissioned from Danish consultancy Copenhagen Economics comes as the last wave of EU countries open up their postal markets to full competition this month, having previously restricted certain areas like the letters market to their national postal operator.

With the Commission keen to ensure that open postal markets actually foster competition, the report notes that legal action has proven “important” in preventing abuses of dominant market positions in those markets that have already liberalised.

The report notes that national competition authorities have handled 50 price-related legal cases.

However, in protecting postal markets against offenses like price dumping, where a dominant market player may offer a business customer a below-cost postal rate in order to keep competitors from winning the contract, the Copenhagen Economics report suggests that regulators are not currently investigating price issues in the right way.

The report criticises “top-down” approaches in which regulators rely on financial or accounting information provided by the dominant postal operators themselves, which often do not sufficiently differentiate costs between different postal products to allow authorities to ascertain whether abuses are taking place.

“The top-down methodology relies on the accounting system of the operator, and it can be difficult for authorities to assess the reliability of the cost estimates,” the report states, adding: “The operator accused of abuse of dominance will have an incentive to present information in a way that serves its own interests.”

Sources of pricing information secured from business customers may also be flawed, the report suggests, or not provided at all, since those customers have a financial agenda to keep their favourable arrangement with the accused postal operator in place.

“The fact that exclusionary abuses normally result in low prices for the large mailers creates a “prisoners’ dilemma” situation where business mailers are often reluctant to contribute evidence.”

The report published by the EU Commission last week recommends instead that regulators develop bottom-up approaches to investigating costs in relation to claims of pricing abuses – calculating costs by looking at the “elementary activities” involved, and totting up the various costs incurred during the operation of business mail services in question.

Regulators in Denmark and Germany currently work in this manner, the report said.

“The bottom-up approach requires good understanding of the production chain. Therefore the first step is to describe the activities in the production chain. The second step is then to describe how the activities would be different if a product was removed. The third step is then to quantify these changes and estimate costs,” the report explained.

Price controls

The report from Copenhagen Economics also highlights other regulatory aspects of postal pricing in relation to the operation of liberalised markets – along with the issue of healthy competition, the report also looks into areas like affordability concerns, and how regulators should tackle the need for EU consumers to have access to affordable universal postal services.

The recommendations highlight the need for more pricing flexibility in a market characterised by declining mail volumes, balanced to ensure that postal operators run an efficient operation.

French regulator ARCEP currently allows La Poste to change its prices with respect to volume developments, the report notes.

“In times of rapid volume decline, it is imperative that the regulatory design contains a volume adjuster which allows for higher prices to compensate for higher unit costs due to reduced economies of scale,” stated the report. “If the universal service provider is not allowed to perform such adjustments this might imply a risk that the provision of universal services becomes financially unsustainable.”

The report notes the removal of price caps by UK and Danish postal regulators to free up postal operators to raise prices as they see fit, other than for a protected second class service. This kind of regulatory approach takes in the idea that postal services are now competing against other channels – most particularly the Internet – and if national operators raise their rates too much, they will lose customers to those alternative channels.

Rather than setting price caps for appointed universal service providers across the board, the Copenagen Economics report suggests that a better approach in encouraging competition is to use controls only in markets where a postal operator has a dominant position.

This is the case in Germany, where Deutsche Post is subject to controls where it has significant market power, the report says, but argues that such an approach does allow regulation in key areas.

“Such a regulatory approach would allow NRAs to monitor and regulate prices for services outside the USO scope where concerns arise,” it states.

Source: Post&Parcel/EU Commission

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